1. BSAD 221 Introductory Financial Accounting Donna Gunn, CA

3. Financial Statements Balance Sheet Income Statement Cash Flow Statement Statement of Retained Earnings Financial statements summarize the financial activities of the business.

4. Financial Statement Relationships Net income increases retained earnings, while a net loss will decrease retained earnings. Dividends decrease retained earnings. Net income increases retained earnings, while a net loss will decrease retained earnings. Dividends decrease retained earnings. DIVIDENDS Decreases RETAINED EARNINGS Net Income = Revenues - Expenses Increases

5. Financial Statement Relationships SHAREHOLDERS’ EQUITY SHARE CAPITAL RETAINED EARNINGS Share Capital and R/E make up Shareholders’ Equity. Increases Net Income = Revenues - Expenses Increases

6. Financial Statement Relationships SHAREHOLDERS’ EQUITY SHARE CAPITAL RETAINED EARNINGS Net Income = Revenues - Expenses ASSETSLIABILITIES SHAREHOLDERS’ EQUITY = + Increases

7. Note that this statement has ONLY revenues and expenses!

8. The income statement impacts Retained Earnings

9. Income Statement Elements Results of continuing operations can be presented in one of the two formats Single step format: Revenues (All Operating Expenses) Operating income Multiple step format: Sales (Cost of Goods Sold) Gross Margin (Other Operating Expenses) Operating Income

10. Classified Balance Sheet Includes comparatives for the prior year Current amounts -Amounts due within / or receivable within 1 year Non-current amounts -Amounts due or receivable outside of a year

11. Balance Sheet $4,800 fixed assets - $1,440 accumulated amortization.

12. Balance Sheet Remember that Total liabilities and equity ($19,945) must equal Total assets ($19,945).

13. Financial Statement Relationships SHAREHOLDERS’ EQUITY SHARE CAPITAL RETAINED EARNINGS Net Income = Revenues - Expenses ASSETSLIABILITIES SHAREHOLDERS’ EQUITY = + Increases

14. Closing the Books Even though the balance sheet account balances carry forward from period to period, the income statement accounts do not. Closing entries: 1.Transfer net income (or loss) to Retained Earnings. 2.Establish a zero balance in each of the temporary accounts to start the next accounting period. Closing entries: 1.Transfer net income (or loss) to Retained Earnings. 2.Establish a zero balance in each of the temporary accounts to start the next accounting period.

15. The Closing Process The following accounts are called temporary or nominal accounts and are closed at the end of the period... Revenues Expenses Gains Losses, and Dividends declared Revenues Expenses Gains Losses, and Dividends declared

16. The Closing Process Assets, liabilities, and shareholders’ equity accounts are permanent, or real accounts, and are never closed. Assets Liabilities Shareholders’ Equity Assets Liabilities Shareholders’ Equity

17. The Closing Process Three steps are used in the closing process... 1. Close revenues and gains to Retained Earnings 2. Close expenses and losses to Retained Earnings 3. Close Dividends (if any) to Retained Earnings

18. The Closing Process To close Ducharme’s Revenue accounts, the following entry is required: Dr. Sales Revenue 35,000 Cr. Retained Earnings 35,000

19. The Closing Process To close Ducharme’s expense accounts, the following entry is required: Dr. Income Summary 33,800 Cr. Cost of Goods Sold Cr. Operating Expenses 27,500 6,300

20. The Closing Process Finally, to close Ducharme’s dividends account, the following entry is required (only if dividends account is directly debited in original dividend journal entry rather than Retained Earnings): Dr. Retained Earnings ???? Cr. Dividends ????

21. Post-closing Trial Balance A Post-closing Trial Balance should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.

22. Current Ratio An important indicator of a company’s ability to meet its current obligations. Current Ratio = Current Assets ÷ Current Liabilities

23. Current Ratio Current Ratio Current Ratio = Current Assets ÷ Current Liabilities Petro-Canada has current assets of $2,826 and current liabilities of $3,348. Current Ratio = $2,826 / $3,348 =0.84

24. The Debt-To-Equity Ratio Debt-To-Equity Ratio = Total Liabilities Total Shareholders’ Equity This ratio measures the relation between total liabilities and the shareholders’ equity that finances the assets. An increasing ratio over time signals more reliance on debt financing and more risk.

25. The Debt-To-Equity Ratio Debt-To-Equity Ratio = Total Liabilities Total Shareholders’ Equity Debt-To-Equity Ratio = $123,900 $246,200 = 0.50